ASSET management information

CONTENTS CONTENTS ................................................................................................. 2 TERMS USED IN THE EP INDUSTRY ........................................................... 3 BUSINESS ENVIRONMENT ......................................................................... 17 A. WORLD PROSPECTIVITY SUMMARY............................................................... 18 B. LICENSING ................................................................................................... 19 C. COUNTRY BRIEFS ......................................................................................... 21 D. PRODUCTION SHARING CONTRACTS............................................................. 37 E. COMPETITOR BRIEFS.................................................................................... 42 COMPANY REPORT.................................................................................... 43 HISTORICAL PERFORMANCE .............................................................................. 44 KEY METRICS .................................................................................................... 44 HSE PERFORMANCE ........................................................................................... 44

ASSET

MANAGEMENT INFORMATION

CONTENTS

CONTENTS 2

TERMS USED IN THE E&P INDUSTRY 3

BUSINESS ENVIRONMENT 17

A WORLD PROSPECTIVITY SUMMARY 18

B LICENSING 19

C COUNTRY BRIEFS 21

D PRODUCTION SHARING CONTRACTS 37

E COMPETITOR BRIEFS 42

COMPANY REPORT 43

HISTORICAL PERFORMANCE 44

KEY METRICS 44

HSE PERFORMANCE 44

TERMS USED IN THE EXPLORATION &

PRODUCTION (E&P) INDUSTRY

This guide was written to be used in conjunction with the ASSET training course, but may be of use as a general guide

Items and explanations in italics refer specifically to ASSET and should not be assumed to be true in the ‘real world’

Words in CAPITALS used in explanations are defined elsewhere in the booklet

Items are listed alphabetically

More detailed explanations of financial terms can be found in the booklet ‘Financial Terms’ available from the Planning and Performance Measurement Team (PPM, Britannic House)

BARREL (bbl)

One barrel (bbl) is equal to 35 UK gallons or 42 US gallons

BARREL OF OIL EQUIVALENT (boe)

This is a term frequently used to compare gas with oil and to provide a common measure for different quality gases It is the number of barrels of stabilised crude oil that contains

approximately the same amount of energy as the gas, e.g 5.8 TCF (of LEAN GAS)

approximates to 1 billion boe

BRENT

Brent crude is a MARKER CRUDE which is traded widely Other crudes are often priced relative

to a marker crude, e.g Brent less $1.50/bbl, using a differential based on CRUDE QUALITY A

BP oil price outlook of, say, $40/bbl refers to the Brent price Brent crude itself typically trades

at $1-$2/bbl below the principal US marker crude WTI (West Texas Intermediate)

BUY BACK

When one party in a JVOA has SOLE-RISKed on an exploration well that has been successful, the other parties usually have the right under the JVOA to buy back into the discovery To cover the fact that the sole-risker has taken some risk, the buy back is usually a multiple of the actual exploration cost − typically five or ten times

CAPEX (CAPITAL EXPENDITURE)

Capex is the sum of expenditure on FIXED ASSETS In BP this includes all expenditure on E&A, whether successful or not Capital items of value for more than one accounting period are

‘capitalised’ or recorded in the BALANCE SHEET and written off in the INCOME STATEMENT over time Revenue items are earned or incurred within an accounting period and are recorded

in the income statement

(For the subtle differences between capin and capex see the ‘Financial Terms’ booklet.)

CONDENSATE

This can refer to any mixture of relatively light hydrocarbons that remain liquid at normal temperature and pressure There will be some propane and butane dissolved in it Unlike crude oil there are few or none of the heavy hydrocarbons which constitute heavy fuel oil There are three main sources of condensate:

(a) The liquid hydrocarbons which are separated out when raw gas is treated This

condensate typically consists of C5 to C8

(b) The liquid hydrocarbons which are recovered at the surface from non-associated gas (c) The liquid hydrocarbons which are produced from a gas condensate reservoir This

may be only slightly distinguishable from a light stabilised crude oil

COST OF SUPPLY

Total cost of finding, developing and producing a barrel of oil (or boe of gas) Defined as Exploration Cost plus DD&A plus LIFTING COST Also referred to as Total Cost of Supply (TCOS)

COST OIL, COST RECOVERY OIL

This is a term used in PRODUCTION SHARING CONTRACTS (PSCs) Costs are recoverable from

a proportion of production, e.g 40%, and this is termed COST OIL See also PROFIT OIL

CRUDE QUALITY

Crude oil varies not only in its ‘gravity’ or density but also in its sulphur content, its metals content, its nitrogen content, and the relative proportion of products produced by refining These and other factors determine the relative market price of different crudes Crude prices are mainly set by the traded price of MARKER CRUDES such as BRENT and WTI (West Texas Intermediate)

DAFWCF

A measure of accident rates for the workforce Days Away From Work Case Frequency

(DAFWCF) refers to workforce incident rate per 200,000 hours worked Includes injuries and illnesses suffered by both employees and contractors

DD&A − See DEPRECIATION

DAILY CONTRACTED QUANTITY (DCQ)

This is the average daily quantity of gas which is contracted to be supplied and taken

DEBT (or FINANCE DEBT)

Debt can be short or long term − the former is due for repayment within one year BP

corporate financial strategy is to have an approx 80/20 split between long/short − this matches the FIXED ASSET/WORKING CAPITAL ratio in our balance sheet Average repayment time is

Finance debt includes loans, bonds, debentures, leases, project finance

DEBT:EQUITY RATIO

The relationship between a company’s debt capital and its EQUITY or share capital is called its gearing Within BP this is usually expressed by the total FINANCE DEBT:finance debt plus equity ratio Finance debt is here taken net of any cash balances Some analysts use the simpler ratio of finance debt to equity In the US a third ratio termed leverage is used, which is the total liabilities:equity ratio − this includes non-interest paying debt in the numerator All these ratios are a measure of the company’s vulnerability to interest changes High ratios may indicate a risky company unless cash flows are very stable and guaranteed in order to cover interest payments The reason for having any debt capital at all is that generally it is cheaper than raising share capital (post-tax), and hence can be used to raise returns on share capital −

if invested wisely

DEPRECIATION

This is an accounting device to spread the cost of FIXED ASSETS over their useful life by charging the cost to the P&L ACCOUNT gradually over the asset’s life

When an asset is acquired, the cost is added to fixed assets in the BALANCE SHEET and there

is no entry in the P&L account Once the asset is in use and earning revenue, each year the fixed assets are reduced by the depreciation relevant for that asset − and this same amount is charged to the P&L account At the end of the asset’s life, it is said to be fully WRITTEN OFF

‘Depletion’ is a similar process that refers to the accounting treatment of reserves or other

‘wasting assets’ Amortisation is the term used for writing off limited life or intangible assets such as leases and goodwill (Hence DD&A − Depreciation, Depletion & Amortisation.)

In BP, production assets are depreciated using a unit of production method based on proven reserves This means that each year the proportion of the remaining asset value depreciated (or more strictly depleted) is given by the year’s production divided by the remaining reserves Other tangible assets are depreciated on the straight-line method, i.e the value is spread equally over the number of years of life Lease acquisition costs are amortised over the estimated period of exploration In ASSET, lease acquisition costs are written off immediately

(a) The same as LEAN GAS i.e the gas contains no hydrocarbons that will liquefy at

ambient temperature and pressure

(b) Gas containing no water vapour, i.e the gas is ‘water dry’

DRY GAS FIELD

The production from such a reservoir will yield DRY/LEAN GAS and very small quantities of CONDENSATE; typically less than 10 BBLS per MMSCF

EMISSIONS TO AIR

A measure of emissions during operations Emissions to air comprise methane, non-methane HCs, sulphur oxides, nitrogen oxides, carbon monoxide and particulates Reported in tonnes

EXPECTED MONETARY VALUE (EMV)

A concept used to evaluate exploration prospects It is calculated as:-

EMV = (value of success) x (risk) − (post-tax well cost) x (1 − risk)

e.g if drilling a prospect has two possible outcomes − success (discovery) valued at $100m (including the exploration well cost) or a dry hole costing $10m post-tax, and the probability of success is estimated at 1 in 5, the EMV is calculated as:

(0.2 x 100) − (0.8 x 10) = 12

If the risk had been 1 in 20, the EMV would have been

(0.05 x 100) − (0.95 x 10) = −4.5

In general, if the EMV is negative, the well should not be drilled

Another way of looking at this is to see the outcome of drilling, say, 20 wells on identical prospects In the first case, on average, there will be 4 discoveries and 16 dry holes, so the total value will be 240

In the second case it will be minus 90 So, any company pursuing a policy of drilling prospects with negative EMVs, statistically will make a loss − assuming its geologists are estimating risk and outcomes, on average, correctly

Before drilling a prospect, there are usually not just two single point outcomes to consider Where there are more than two outcomes, e.g the discovery might be either oil or gas, a decision tree is drawn and the same principles applied

In order to take account of the fact that there is a range of possible reserve outcomes, not a single point, the value of success should be calculated using the EPV rather than the NPV of, say, the EXPECTED SIZE

(Strictly speaking, the risk of failure is defined as the chance of the reserves found, if any, being outside the expected range In practice, this is rarely different to the risk of a dry hole.)

EXPECTED PRESENT VALUE (EPV)

For a prospect, and even a discovery, there is a range of possible reserves represented by a cumulative probability distribution In valuing this, the NPV is often calculated for a single estimate of reserves − usually the mean This effectively ignores the data contained in the distribution curve A better representation is to use the EPV, which is, in effect, the risk-weighted NPV across the range To calculate this, three NPVs are measured, e.g the P5, P50 and P95 values The NPVs are then plotted against probability:

Probability Well cost

The EPV is calculated by estimating the area under the curve Note that, where the NPV is negative, that part of the graph is replaced with the well cost, since in practice the

development would not proceed

The point where the graph crosses the x-axis gives the probability of a commercial discovery, assuming/the hydrocarbons are present Note that this is different to the probability of failure

EQUITY

An accounting term for shareholders’ funds A company can choose to finance its operations from equity or from DEBT An existing public company such as BP can raise funds by a ‘rights issue’ - giving existing shareholders the right to buy new shares, usually at a discount to the current market value It could also purchase other companies in exchange for newly issued shares instead of cash, provided it has shareholder approval In the BALANCE SHEET, equity or shareholders’ funds are made up of nominal value of issued shares (not the market value) and retained profits

Note that equity is also used to denote a company’s share of a licence or asset − see DILUTE EQUITY

gas price in year n = base gas price x (fuel oil price in year n)

base fuel oil price

Given the lead times in developing gas fields, no gas will be sold at the base gas price (often called the boilerplate price or P0 price) Also note that the gas price for year n will need to be known at the beginning of year n, so that invoices can be made out correctly and retroactive changes be avoided To overcome this, the gas price is based on the fuel oil price for a historic period − say 1.7.(n-2) to 1.7.(n-1) The base fuel oil price will be set historically, so, if the above contract had been signed in January 1995, the base fuel oil price would have been the historic average between 1.7.1993 and 1.7.1994 So the formula becomes:

gas price for 1999 = base gas price x (fuel oil price 1.7.97 - 1.7.98)

(fuel oil price 1.7.93 - 1.7.94) Transportation tariffs are usually escalated with inflation, with crude oil price or with a mixture

of the two Thus a 50/50 escalation formula for oil transportation tariffs would be:

tariff n = base tariff x (0.5 x oil price n ) + (0.5 x inflation n )

base oil price base inflation

EXCESS COST RECOVERY

In PSCs costs are allowed to be recovered from COST OIL, which is a percentage of total production Excess cost recovery refers to any cost oil remaining after recovering all allowable costs in any one year This may be shared between contractor and government, as for PROFIT OIL, or it may revert to the government, depending on the country in question

EXPECTED SIZE

Prospects and discoveries will have a range of possible reserves These usually follow a log normal distribution The expected size is the mean, which is usually larger than the MEDIAN (or P50) case Both the mean and median are larger than the mode or ‘most likely’ (the highest point on the curve corresponding to the reserve size with the highest probability of occurring) For a normal distribution, all three values are the same Reserve estimates tend to

be log normal, since they are calculated from multiplying a number of factors together The downside is fixed at zero, but often there is a long upside-down tail, at low probability, leading

to a skewed or log normal distribution and to the mean being higher than the mode

(In ASSET the expected size is shown as the arithmetic average of the estimated range Note that there is a probability that the ‘actual’ reserves will lie outside the initial range.)

FARMIN

Where one company owns acreage in which another company wishes to take a share, it is traditional to do this by means of a farmin The owner (the farmor) agrees to transfer a percentage of the licence to the farminee in return for the farminee funding some agreed work programme Typically, if BP owns a block 100% and Shell farms in on a ‘2 for 1’ basis, Shell will pay the cost (100%) of one well and thus earn 50% of the licence A ‘4 for 1’ deal would only earn 25% for the same obligation One advantage of farmins is that there are no tax implications − they are not treated as acquisitions or disposals

FINDING COST − See F&D COSTS

FIXED ASSETS

This is an accounting term used in the balance sheet and comprising:

(a) tangible assets − physically verifiable assets used to earn revenue

(c) long-term loans (not relevant in ASSET)

Assets are valued at cost less DEPRECIATION (or DD&A) taken to date

Exploration expenditure, which has not been WRITTEN OFF, is held in intangible assets until sanction is given for development, when it passes to tangible assets, and is then depreciated over time

FUNDS FLOW

This is the net cash flow for a period comprising all revenues received in the period less all costs paid out in the period (Within BP now, the terms cash flow and funds flow appear interchangeable Originally, cash flow was before deducting CAPEX: funds flow = cash flow − capex.)

GAS CAP GAS

This is NATURAL GAS which lies above the crude oil in a hydrocarbon reservoir

GAS CONDENSATE RATIO

(a) For a GAS CONDENSATE RESERVOIR, this is the ratio of the CONDENSATE to the gas

As for oil, it can be measured in SCF per BBL Alternatively, the inverse is used and the typical units are BBLS and MMSCF

(b) For a DRY GAS FIELD, only the inverse is normally used Typically, units are again

BBLS and MMSCF, but grammes per cubic metre may well be used

GAS CONDENSATE RESERVOIR

Neither NATURAL GAS nor crude oil is the predominant production stream To increase the recovery of the CONDENSATE, the gas may be RECYCLED for the early years and produced at a later date

GAS CYCLING or RECYCLING

Produced gas is reinjected into the reservoir after removal of the Condensate This is to maintain the reservoir pressure and prevent CONDENSATE from ‘condensing’ in the reservoir and then becoming difficult to recover

GAS OIL RATIO (GOR)

For an oilfield this is the ratio of gas to stabilised crude oil to the gas It is usually measured in SCF per BBL The gas is known as ‘associated gas’ and in some environmentally sensitive areas

is no longer allowed to be flared Some of the gas is used to run turbines for power

Generally, ASSOCIATED GAS is a nuisance especially since the production rate is driven by the oil production rate and this does not give a good profile for gas buyers (In ASSET there is no nuisance value ascribed to associated gas.)

GEARING − See DEBT/EQUITY RATIO

GOR − See GAS OIL RATIO

GROSS RESERVES

These are the total reserves under a company’s control before deducting any royalties (whether

in kind or not) BP’s account reports NET RESERVES See also RESERVES (HYDROCARBONS)

HSE

Health, Safety and Environment SHE is also sometimes seen The principal items reported by oil and gas companies are: Fatalities, Days Away From Work Case Frequency (DAFWCF), OIL SPILLS and EMISSIONS TO AIR Safety reports generally follow US Occupational Safety and

Health Administration (OSHA) guidelines for classifying occupational injuries and illnesses throughout company operations Reported safety data for the workforce include injuries and illnesses suffered by both employees and contractors

INCOME STATEMENT

This is a summary of the revenues and expenses of a business for an accounting period

(usually a year) It is also known as a Profit & Loss Account, P&L or an operating statement See PROFIT

ISO 14001

Part of the ISO 14000 series of international standards on environmental management Achievement of ISO 14001 status demonstrates compliance with International Standards Organisation Environmental Management Standards

JVOA OR JOA

Joint Venture Operating Agreement or Joint Operating Agreement is an agreement signed by companies jointly acquiring licences It sets out how the JV will operate, from licence bidding through to production It will cover appointment of operator, voting rights, default provision, etc

LEAN GAS or DRY GAS

This is gas with relatively few hydrocarbons other than METHANE The calorific value is

typically around 1000 BTUs per SCF, unless there is a significant proportion of non-hydrocarbon gases present

LIFTING COSTS

These are defined as OPERATING COSTS less transportation costs The latter includes the cost

of owned pipelines, tariffs paid to third parties, and payment for the use of owned or chartered tankers

LIQUEFIED NATURAL GAS (LNG)

This is NATURAL GAS (mainly METHANE), which has been liquefied by reducing its temperature

to around −162ºC at atmospheric pressure This is an efficient way of transporting gas over large distances, especially across oceans However, substantial investment is needed in terminals at each end of the journey and in special vessels Hence such schemes are only used for large reserves sold on a long-term contract − typically 20 years, minimum size 5TCF

LIQUEFIED PETROLEUM GAS (LPG)

This is propane, butane or a mixture of both which has been liquefied by reducing the

temperature, increasing the pressure or a combination of both LPG is commonly called ‘bottled gas’ and one trademark is Calorgas Typical uses are for camping, caravaning and in isolated homes

MARKER CRUDE

These are crudes used to set world prices Such crudes need to be available in reasonable quantities over a period of time Currently, they include BRENT and WTI (West Texas

Intermediate) Although each crude does have its own market, trends are set by the

movement in the marker crudes

MEDIAN

A statistical term equal to the P50 case, i.e there is an equal chance of the reserves lying above or below this value See EXPECTED SIZE for more detail

METHANE (CH 4 or C1)

This is the lightest of the hydrocarbon gases At atmospheric pressure, it liquefies at −162ºC

MONEY OF THE DAY (MOD)

This refers to the actual historic cash flows or future cash flows, estimated after allowing for inflation, i.e what you will actually pay Cash flows expressed in terms of one year’s money, i.e specifically excluding the effects of inflation, are called REAL Deflating MOD cash flows gives real cash flows

NATURAL GAS

(a) This is a mixture of generally gaseous hydrocarbons occurring naturally in underground

structures There will always be some CONDENSATE and/or oil associated with the gas

(b) The term is also used to mean treated gas that is supplied to industrial, commercial and

domestic users and meets a specified quality

NATURAL GAS LIQUIDS (NGLs)

There is no precise definition NGLs are essentially those hydrocarbons that can be extracted in liquid form from NATURAL GAS as produced Typically, ethane, LPG and pentanes will be the predominant components, but there will also be some heavier hydrocarbons present

NET PRESENT VALUE (NPV)

The net present value is the sum of future cash flows deriving from an asset, discounted at a given rate The cash flows are usually deflated to give REAL cash flows and are then

discounted at a rate equivalent to the company cost of capital This takes account of the higher investment value of cash in hand now rather than later It is a widely used term since it

is a simple concept that is additive, e.g an incremental project NPV can be added to the base case simply, unlike RROR It is, however, a single point estimate and care should be taken when quoting NPVs to state the assumption, particularly the discount rate and oil price used

NOMINATION

This is the quantity specified by the seller within the terms of the contract for gas sales over a forthcoming period

OIL SPILLS

Oil spills are defined as number of oil spills (>1 barrel in volume) that breach final containment

to reach land or water

OPERATING PROFIT

This is operating revenues less OPEX, less production tax liabilities for the revenues earned, less DD&A It is the figure before deducting interest, profits taxes (e.g CT) and extraordinary items

In BP we usually quote this on a ‘Replacement Cost’ (RC) basis as opposed to an ‘historic cost’ basis The difference lies in the valuation of stock RC assumes stock would be replaced at current prices as opposed to the price at which it was historically purchased

Replacement Cost Operating Profit is commonly referred to as RCOP

(a) Capital Efficiency or Profitability Index In ASSET, a measure of ‘bang for your buck’,

defined as NPV divided by NPC where NPC is the discounted ‘value’ of the pre-tax investment (capex) Important where capex is constrained However, where cash flow

is the real constraint, post-tax capex is a better denominator In BP a more

sophisticated capital efficiency denominator, known as NPCe, is used, which measures the discounted post-tax negative cash flow exposure

(b) Prospect Inventory A list of all exploration prospects In BP, three categories are

recognised:

Notional − not recognised, but may exist, based on regional analysis

Lead − recognised but too poorly defined to justify drilling

Prospect − no further work justifiable prior to drilling

Drillable prospects are further classified as those with positive EMV, those with negative EMV but positive EPV, and those with negative EPV

c) Performance Information A BP planning and monitoring process

PLATEAU RATE

Production profiles are usually designed to achieve ‘plateau’ quickly and then remain there for some years There is a trade-off between maximising the plateau rate and minimising the required capex For gas fields, the buyer’s required profile is also a factor

POST-SEISMIC

In ASSET we have differentiated, for bid purposes, two categories of licence: those where seismic has already been shot and hence where data is available on actual prospects (post-seismic), and those where no seismic is available and bids must be based on a data from

‘typical prospects’ (pre-seismic) Since seismic is automatically shot in the first year of the award of a pre-seismic licence, the difference is only evident at the bid stage

While this mirrors the real world, the terms post- and pre-seismic are ASSET specific

PRE-SEISMIC − see POST-SEISMIC above

PRODUCTION SHARING CONTRACT (PSC)

Under these contracts, the hydrocarbons remain the property of the State The oil company (or

‘contractor’) takes all the exploration risk and only recovers its costs if it is successful All costs are recovered via a share of production − usually from a maximum percentage of the

production (e.g 50%) called ‘COST RECOVERY OIL’ The remaining hydrocarbons (called

‘PROFIT OIL’ or ‘profit share oil’) are shared between the contractor and the state according to predetermined percentages Licence bid premia may be paid and are not usually allowed for cost recovery See also EXCESS COST RECOVERY

PROFIT

This is an accounting term which attempts to match up relevant costs with relevant revenues Profit is usually a better indication of the state of a business than funds are since it partly reflects historic decisions (capex is spread over the life of an asset unlike in funds) and partly takes account of future downsides (e.g provisions are made for future abandonment costs) Note that it is a conservative view, since future upsides are not allowed to be taken into account until they are realised See also BALANCE SHEET, DEPRECIATION, PROVISION AND NET INCOME

PROFIT OIL

In a PSC it is the portion of the production that is shared between contractor and

Government/state in certain ratios See PSC, COST OIL

PROFIT AND LOSS ACCOUNT − See INCOME STATEMENT

PROVISION

This is an accounting term used to acknowledge future costs that are reasonably certain to be required, e.g abandonment costs and taxes Note that, under the accounting concept of prudence, it is only future losses that are provided for − profits can only be taken when

realised In ASSET there are no abandonment costs and there is no deferred tax, so the category of ‘Provisions’ is not used

PSC − see PRODUCTION SHARING CONTRACT

R:P RATIO

Reserves:Production ratio defined as total reserves over annual production and expressed in years A performance measure of E&P companies used by analysts − particularly in comparing changes each year Typical values for majors are in the range 10 - 15 years For some

countries such as Saudi Arabia, much larger numbers apply

The word ‘reserves’ needs to be qualified in several ways in order to be meaningful:

(a) Remaining or original (sometimes referred to as RRR and ORR for remaining or original

recoverable reserves Note the word recoverable here is strictly speaking redundant), i.e whether or not reserves already produced are excluded or not

(b) Gross or net This refers to royalty even where royalty is not paid in kind SEC

(US Stock Exchange rules) definitions are always net and this drives BP to report reserves externally as net

(c) Equity share, i.e are we quoting 100% of the reservoir of BP’s share Note that, for

other parameters such as acreage this is described as net/gross − beware!

(d) Categorisation SEC defines proven reserves and classifies these into developed and

undeveloped BP has a more complex system, defining a range of sub-categories

In ASSET the following categories are used:

(a) Development and Production, i.e sanctioned/committed

(b) Discoveries

(c) Prospects − risk weighted

Note the third category is not strictly reserves but is a measure of the Prospect Inventory

RETURN ON AVERAGE CAPITAL EMPLOYED (ROACE)

This provides a measure of how efficiently a company is using its assets

In BP ROACE is defined as NET INCOME before interest, divided by the capital employed during the accounting period (taken as the average of the start and end values) Capital employed is defined as FIXED ASSETS plus WORKING CAPITAL and cash less PROVISIONS

RROR and IRR

RROR is the real rate of return that gives an NPV of zero when used to discount a given real cash flow IRR (Internal Rate of Return) is its MONEY OF THE DAY (MOD) equivalent and differs only by incorporating effects of annual inflation In ASSET, economics are generally expressed in REAL terms A typical RROR is 3%-5% lower than its IRR equivalent

SOLE-RISK

In a JVOA there is usually provision for a party or for minority parties to sole-risk activities that the other parties have voted against It is a last resort, rarely used, since it can easily lead to litigation

Where a party has sole-risked an exploration well, the other parties usually have the right to BUY BACK in at a penalty The penalty is set at a multiple of the actual cost, say five or ten times, to cover the risk taken by the sole-risker

SOUR GAS

Gas containing hydrogen sulphide or other sulphur compounds

STANDARD CUBIC FOOT (SCF)

Unit of gas volume measurement, defined at 60ºF and 30" Hg

SWEET GAS

Gas with no, or very little, hydrogen sulphide or other sulphur compounds

SWING

The percentage by which the rate of gas to be supplied under a contract at any time may differ from the DCQ at the buyer’s choice

TAKE OR PAY

When the buyer takes less than the contracted amount of gas over a stated period, this

provision requires the buyer to pay the supplier for the shortfall

TRANCHE

This term is used to denote a portion of production to which a particular PROFIT OIL share refers in a PSC For example, a country could specify three production tranches: 0−50 MBD, 50-100 MBD, and >100−MBD For each of these tranches, a different profit oil share would apply

ULLAGE

This is the spare capacity in a pipeline Throughput plus ullage should equal capacity

WET GAS

(a) The same as RICH GAS, i.e the gas contains some hydrocarbons which will liquefy at

ambient temperature and pressure

(b) Gas containing water vapour, i.e the gas is ‘water wet’

WORKING CAPITAL

This is a balance sheet item covering resources needed to maintain a company’s operations on

a day-to-day (short-term) basis This covers current assets (stocks including work in progress, cash and money owed − debtors) and current liabilities (goods and services received but not yet paid for − creditors) Current here meaning being paid within one year Current assets should be limited to assets that can be converted to cash

WRITE-OFFS and WRITE-DOWNS

Assets should only be reflected in the BALANCE SHEET if they are estimated to be worth at least the cost (the undepreciated capex) shown there Assets that no longer have any value at all, e.g aborted exploration costs must be written off, i.e their value in the balance sheet must

be reduced to zero and the previous value must be deducted from the profit Similarly, if an asset’s future value (NPV) is below the value shown in the balance sheet, that value should be written down to the future value This is known as failing the ceiling test, and might occur where development drilling has shown initial reserves estimates to be too optimistic Again, the

difference must be deducted from income Note that write-offs and write-downs do not affect cash flow, unless there are tax implications For example, aborted exploration and successful exploration might be treated differently for tax purposes

ASSET

BUSINESS ENVIRONMENT

This section contains the following information:

A An overview of world prospectivity

B A brief summary of scouting reports on licensing

C A series of country briefs, but there may be others out there…

D Information on Production Sharing Contracts (PSCs)

E Competitor briefs

A WORLD PROSPECTIVITY SUMMARY

Your exploration department has given you the following table, showing their view of the

prospectivity of the ASSET World

Country Onshore Offshore Deep water Arctic

Albion Oil No Yes No No

Bravura Oil Yes No Yes No

Corum Tanu Oil Yes Yes No No

Dhangyen Oil No No Yes No

Your company has its HQ in Albion and has production and exploration licences in Albion and

Bravura You have a discovery in Corum Tanu and a licence in Dhangyen More detailed

information on your position in each of these countries will be found in later sections of this

Management Information document

For technology purposes, four different environments are identified ;

• Onshore

• Offshore Shallow

• Deepwater

• Arctic

You and your partners all have equal competence in onshore and shallow offshore

technologies Your company currently has a moderate level of competence in deepwater, but

no arctic expertise Your level of competence may have a significant impact on the cost

efficiencies you can bring to bear in these frontier areas

Countries Corum Tanu and Dhangyen use Production Sharing Contracts and we enclose

some outline notes on these types of contracts for those of you who might be unfamiliar with

them

B LICENSING

Albion has held licensing rounds at regular intervals, the last one being two years ago Following a number of relinquishments and the discovery of new play types, there is now a large amount of acreage that could be offered There will almost certainly be a round this year, and there are rumours that there may be a further round in the next two years

Following leasing opportunities two years ago in the deep water province, there have been no further opportunities in Bravura, and the industry expects a new set of leases to be offered in within the next two years

Corum Tanu has had several licensing rounds over the last three years, and no more are expected for two years Historically, both onshore and offshore acreage have been made available in each round

Dhangyen has promised that shallow water licences will be made available this year but there is scepticism in the industry that the administration will be available to react so quickly following the civil war Deep water licences are unlikely to be available for at least three years

The timing of any licensing in Exteria is highly speculative, given the lack of geological data and environmental considerations

There are also several other less well-known parts of the ASSET world that may, or may not, have been active oil provinces in the past, about which very little may be known at present, and which may become the subject of new or renewed interest by major oil companies The world geopolitical scene has shifted radically in recent years, and is starting to open up some previously closed or otherwise inaccessible areas Information on such regions is presently very patchy, and the prospects for formal licensing or other entry mechanisms may have to be established by the creative endeavours of your New Access teams

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ASSET

Albion

A good industrial infrastructure exists, together with the ability to import goods and services freely An extensive infrastructure for gas and downstream markets is in place

Hydrocarbon history

Oil was discovered in the late 1980s and gas was discovered soon afterwards, both offshore in depths below 100m Net export of oil was achieved in 1997 and is expected to continue into

2010 Gas production was slower to develop, but recent green pressures have seen schemes

to replace oil and coal with gas Gas demand is forecast to rise steeply

The majority of the prospective acreage has been licensed, although some from earlier rounds has since been relinquished The remaining unlicensed acreage is mainly around existing fields, but there are a few high-risk blocks in remote areas where hydrocarbon presence has yet to be established

Gas market

There are three sectors: domestic, industrial and power generation - with the latter providing most of the growth potential Oil companies are selling direct to power stations and to end users as well as via large distribution companies

Demand is likely to exceed supply over the next five years, although this will depend on the success of the many proposed power schemes

Gas prices are around $6-$7/mcf (equivalent to about $40/boe) usually indexed to a mixture of RPI and oil price

Licensing rounds

Licences are awarded mainly on technical merit, i.e the best realistic programme to test a block’s potential Commitment wells have to be drilled in the first four years of a licence, and the licence must be relinquished after eight years if no development decisions have been taken Production licences are awarded, lasting 30 years when development is agreed No licence premia are required

Your company’s position

Albion is your HQ The group has a strong presence, and the exploration business has been involved as an operator from the early stages of exploration Relations with the government are important for the group Your technical view is that there are unlikely to be any prospects greater than 200 mmboe left to find in the mature areas

You are the 100% owner of a key oil pipeline, which is strategically placed to transport most of the industry’s future oil development, including your own

Fiscal regime

A fairly sophisticated system has evolved, which has been fairly stable over the last five years, despite falling oil prices The system has generated a fairly high level of activity in greenfield developments, but incremental developments on the older fields are not attractive and the

industry is lobbying for change In the past, changes have been tax neutral, and some

companies are concerned that any quid pro quo will not be in their particular interests

Radical changes in the system are unlikely and, given the current state of the economy, there are unlikely to be any ‘give-aways’ The most likely scenario is some trade-off between old and new fields However, politicians are subject to re-election at least every four years

The E&P industry is ring-fenced from all other industries, so losses cannot be offset either way between E&P and other businesses such as chemicals

Royalty is paid at 15% of gross revenues with no allowances

Petroleum tax, currently set at 70%, is deducted after allowing for:

(a) royalty

(b) operating costs

(c) field development costs, which up to first production are uplifted by 25% (i.e if $100m

is spent, $125m is allowed against tax)

(d) the first $50m revenue each year is exempt, through an ‘oil allowance’ (strictly a hydrocarbon allowance since it applies to gas too)

Development costs in any field are not allowable against revenues from any other field (i.e they are ring-fenced) E&A costs, however, are allowable against any E&P revenue, i.e they are not ring-fenced These costs are limited to E&A drilling costs and seismic costs, and may be carried forward indefinitely

The pipeline is treated as if it were part of the Eagle field All tariff income is added to Eagle’s revenue and taxed as if it arose from production

Tax is cash-flow based, rather than profit-based and is paid six months in arrears

Industrial Safety and Environment

Industrial safety regulations are amongst the most modern and comprehensive in the ASSET world However, a series of recent high profile industrial and public service accidents in Albion have led to pressure for legislation on corporate and managerial accountability on HSE Some pressure on environmental policies, giving rise to legislation, has made costs higher than

in less developed countries

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BAT

Belle

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Political

Bravura has a very stable democracy, and is one of the more prosperous countries It is a heavy energy user with a well-developed infrastructure Currently, Bravura is a net importer of energy, and is often criticised as the highest per-capita user of energy in the ASSET world

prospects available, although there is potential in an environmentally protected area It is not clear if this will ever be licensed

More recently, a third province has opened up in deep water Prospects look good for sized oilfields, several of which have already been discovered by your competitors

Your company’s position

You have decided not to compete in the old onshore province You have a major position in the onshore/shallow water (but high cost) province, but production is in decline The oil

industry (including your company) continues to lobby for the releases of acreage in the

environmentally protected area

Your company has built a fair position in the deep water province Potential exists for 1 billion bbl discoveries, but the range is more likely to be 250−500 mmbbl Much less than this would

be uneconomic You have favoured operatorship in order to influence early production and hence to assist early payback in a high cost area

Fiscal regime

A simple tax system with no ring-fencing Lease bids are not tax deductible All costs except development capex are immediately tax deductible Development costs are depreciated over

10 years on a straight-line basis The current tax rate is 50%

History and the current political climate suggest that any changes to the system are likely to be detrimental rather than positive ‘Windfall profits’ tax have been introduced in the past when oil prices rose

Industrial Safety and Environment

Industrial safety regulations are highly developed Recent environmental laws have increased the costs of operating in the upstream industry and have also delayed the opening up of frontier areas

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Cara

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Corum Tanu

ASSET

CORUM TANU

Cara

Tilly Tania

CORUM TANU

Political

Corum Tanu is a stable developing-world country with a one-party ‘democracy’ Industrial infrastructure is growing, but hydrocarbon receipts still dominate the economy There is a very strong coal lobby protecting 25,000 jobs in the large mines in the south of the country There

Over the past few years, a number of gas discoveries have been made − all around 1 tcf each

In addition, there are considerable quantities of associated gas from the many small oilfields Until recently, the government has allowed this associated gas to be flared where necessary These discoveries are not large enough to make LNG attractive, so the only accessible market is Corum Tanu

The recent gas discoveries have reawakened the local gas market, which had previously been restricted to one coal gasification plant in the port area of the capital supplying gas to domestic and commercial customers in the city only The gas industry is dominated by the Corum Tanu Gas Company (CTG), the legal monopoly, and all gas must be sold to them However, in an attempt to promote gas developments offshore, the government has encouraged CTG to offer attractive prices to producers It is also looking for ways to stimulate growth in the market The use of gas for power generation is prohibited by a law passed in the early 1990s when gas was described as the noble fuel, too precious to burn for electricity The coal lobby were also active in this move Recent technological advances in combined cycle generators, and

considerable pressure from external power utilities and the World Bank, have caused the government to initiate a review of this policy

Your company’s position

Chevron had been the most aggressive explorer for gas and had made all three onshore discoveries − you are the 50% partner in one of these The base price is $4.75/ mcf indexed to

US inflation and the field will come on stream within the next two years Your technical

department rates Corum Tanu as highly prospective, with gas the more likely phase onshore, and offshore prospects in the 100 mmbbl range but in a low-cost environment

Fiscal regime

Licences are awarded under a Production Sharing Contract There is no government

participation Costs may be recovered from 50% of gross revenues Premium payments and incentives are not cost recoverable Development costs may be recovered over five years on a straight-line basis Other costs may be recovered immediately from revenues, provided there is enough cost recovery Each licence is ring-fenced, i.e only costs associated with that licence may be recovered from the revenues from any one licence This means that costs for a licence with no production are for your 100% account Production tranches are set by the government

(0-15 mbd, 15-30 mbd and >30mbd), but you must bid for the profit shares The fiscal regime has been unchanged for some time

Industrial Safety and Environment

The beginnings of an environmental movement are apparent in Corum Tanu The government has recently tightened up on safety and environmental legislation following a mining accident that killed over 100 people